The last few years in the history of the SFr20bn (e13.1bn) Geneva-based Swiss Social Security fund AHV-Fonds (Ausgleichsfonds der Alters und Hinterlassenenversicherung/Fonds de compensation de l’assurance-vieillesse et survivants) have been revolutionary, when considering its rather conservative pay-as-you-go (PAYG)/first pillar origins.
While AHV is still Switzerland’s PAYG system, the top-up ‘ausgleichsfonds’ have been invested in a progressively more aggressive fashion over the last three to four years to combat deficits, which in 1998 had doubled to Sfr1.8bn – principally as a result of demographic trends.
At this time the expenditure of the first pillar, AHV, had risen by 3.5%, far more than the 1.3% rise in contributions.
Despite being one of the biggest institutional funds in the country, AHV started a performance-orientated investment policy only in 1997. The first year’s results recorded performance of 15.8% and a direct return of 8%.
However, the asset mix was still very conservative at the time, with 89% of its portfolio held in loans and bonds. Equities accounted for only 8%.
In 1998 the AHV invested an additional Sfr2bn in shares, and declared its aim to push its equity holding up to 25% over the next three years.
And in July 1998, the fund awarded its first mandates to external managers, albeit in a rather restricted fashion due to the requirement by Swiss law that all investment had to remain domestic.Credit Suisse picked up an SFr450m passive Swiss equity mandate, with UBS also receiving SFr300m in passively managed shares.
A whole raft of active Swiss equity funds valued between SFr100m and SFr150m were also awarded to Lombard Odier, Pictet & Cie, Julius Baer, Independent AM, ABN Amro, Daiwa Securities and Zürcher Kantonalbank.
On February 1 this year, however, changes were made to Swiss law allowing the fund to invest in global equities.
The fund’s resulting rethink about its investment policy saw a change in approach from active to passive equity investment, accompanied by the move on to the global investment scene. The appointments, the fund said, were the first step in the implementation of a new investment policy.
State Street Global Advisors picked up an SFr500m passive brief, to be benchmarked against the Dow Jones Sustainable Index.
The index constitutes more than 200 companies in 64 industry groups in 33 countries and consists of a global, European, North American, Pacific and a US index, and specialised indexes, which exclude either one or all of the following industries: alcohol, gambling and tobacco.
UBS Asset Management collected the other passive mandate for SFr1bn, benchmarked against the FTSE World Index.
Dominique Salamin, executive director of AHV-Fonds, said the reasons for selection of the managers included their tracking skill and fee structures. However, the appointments came at the expense of the raft of active Swiss equity mandates.
Salamin said the incumbents were dropped both for reasons of performance, as well as the new allocation decision in favour of global equity.
“We took the decision to review the investment management structure of the fund and in particular the asset allocation process, as a result of the decision taken by the Swiss parliament to allow this fund to invest in foreign equities.”
The introduction of Switzerland’s new stamp duty on July 1 of 15 basis points per transaction, also contributed to the decision, he added. The fund was advised by consultants ECOFIN.